Fed Maintains Target Rate, Dot Plot Increasingly Dovish

Fed Maintains Target Rate, Dot Plot Increasingly Dovish

The Fed will meet to discuss interest-rate policy this week, with an announcement scheduled for Wednesday, but economists expect it to announce no change to rates. "The Fed also sees one hike priced in for 2020, but that might not matter as many will join the camp that the next move will be a cut".

In its statement following a two-day meeting in Washington, the Federal Open Market Committee (FOMC) repeated January language that it will be "patient" amid "global economic and financial developments and muted inflation pressures".

It lowered its inflation prediction for 2019 to 1.8 per cent, down from December's figure of 1.9 per cent, saying: "On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices".

"This was definitely a dovish outcome and even a bit of a surprise", said Ben Emons, managing director of global macro strategy at Medley Global Advisors in NY. The current expectations are that the Fed is unlikely to raise interest rates again this year.

Reaction in markets confirmed the dovish interpretation.

The single currency was a shade lower at 1.1347 dollar. Fed funds futures point to about a 30 per cent chance of a cut by the end of year.

The Fed also announced it would conclude its balance sheet reduction by September, a relief for Wall Street and in line with what President Trump wanted.

The central bank in January pledged to revisit the process after financial markets late a year ago were thrown into turmoil in part because of concerns the Fed was too rigid in the "balance sheet normalisation" plan.

The initial investment in new Treasury maturities will "roughly match the maturity composition of Treasury securities outstanding", the Fed said. Gains were slim as the Fed decision approached.

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The central bank's new embrace of patience and flexibility reflects its calming response since the start of the year to slow growth at home and overseas, a nervous stock market and persistently mild inflation.

The Fed's statement and projections as well as Powell's accompanying press conference are likely to be in the spotlight on Wednesday amid an otherwise quiet day on the USA economic front.

The Fed has made clear that with a dimmer economic picture in both the United States and globally, it no longer sees the need to keep raising rates as it did four times in 2018.

"Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low", the Fed said. It also downgraded its economic outlook, forecasting 2.1% gross domestic product growth in 2019, rather than 2.3% as expected before.

Most currencies remain within well-trodden trading ranges before the Fed decision, as market participants were cautious after taking cues from US data offering new signs the world's top economy is on a path of slower growth.

With an eye to the future, central bankers are likely to cut their media forecast for the number of rate hikes expected this year from two to one or even zero.

In Wednesday's forecast, the Fed indicated a single-rate interest increase in 2020 and none in 2021.

Combined, the moves signal no major increases in borrowing rates for consumers and businesses.

And while stocks struggled Wednesday, the Fed's plans for no credit tightening this year sent Treasury yields tumbling, with the 10-year yield touching its lowest level in more than a year.

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